Do proponents of the human beneficiary principle misunderstand the fundamental principles of the trust concept?

Do proponents of the human beneficiary principle misunderstand the fundamental principles of the trust concept?

Written by Clinston Chiok

Do proponents of the human beneficiary principle misunderstand the fundamental principles of the trust concept? This piece analyses the fundamental principles of the trust concept and argues that the statement above is misconceived.

1. The orthodox concept of a trust

As stated by Viscount Simonds in Leahy v AG of NSW[1], ‘a trust may be created for the benefit of persons as a cestui que trust, but not for a purpose or object unless the purpose or object be charitable’. This statement sets out the so-called ‘human beneficiary’ principle, which is that non-charitable trusts require human beneficiaries.[2] This principle is fundamental to the trust concept; if no one else besides the trustee has beneficial ownership of the property, not only is there no one to enforce the trustee’s obligations, but the trustee is under no obligation to begin with as he owns the property absolutely.[3] This is consistent with the court’s ‘orthodox sentiment’ of the trust,[4] that prima facie, a trustee is not subject to an obligation ‘unless there were somebody who could enforce a correlative equitable right’. [5] This person is the human beneficiary. It follows that if the human beneficiary principle is fundamental to the trust, charitable trusts must be seen as an exception since they are enforceable by the Attorney General acting as parens patriae[6] and do not involve any beneficial ownership of the property.

2. The trust as a ‘rule-concept of duty’

In Harris’ thesis, two concepts of legal duty are discussed.[7] Firstly, the ‘relational concept of duty’;[8] ‘that “duty”, is by definition the correlative of a right (in the sense of an affirmative claim) vested in a specific individual.’[9] Secondly, the ‘rule concept of duty’;[10] a trustee is under a duty to do something because there is a rule (which may be a sanction or a ‘strong social pressure of a non-coercive kind’[11]) requiring him to do it. The relational concept of duty is consistent with rationale behind the human beneficiary principle and the courts seem to apply this concept in determining the validity of the trust. In Armitage v Nurse,[12] Millett LJ expressed that ‘there is an irreducible core of obligations owed by the trustees to the beneficiaries and enforceable by them which is fundamental to the concept of a trust. If the beneficiaries have no rights enforceable against the trustees there are no trusts.’

However, Harris’ view is that the relational concept adopted by the courts is inappropriate in defining the trust. He asserts that in its most generic and fundamental form, the trust is a rule-based duty which does not necessarily involve co-relative rights.[13] As a result of trusts being defined using the relational concept of duty, charitable trusts have to be viewed as an exception and ‘anomalous cases’[14] (valid non-charitable trusts that exist without a human beneficiary) must be classified as ‘trusts of imperfect obligation’[15] since the relational concept cannot explain their existence. Furthermore, in the case of a valid discretionary trust where trustees have discretion to distribute income coupled with a power to accumulate, correlation between rights and duties cannot be found since potential beneficiaries do not have an affirmative claim to have the duty to distribute carried out.[16] Even if the potential beneficiaries, acting collectively as a whole, exercise the rule in Saunders v Vautier[17] to terminate the discretionary trust, there is still no correlational right to the trustee’s duty. Thus, the rule in Saunders merely gives the beneficiaries a ‘power correlating to a liability on the part of the trustees, not a right correlating to a duty’ – since terminating the trust does not oblige the trustees to perform any part of their office but rather brings the office to an end.[18]

To encompass all possible valid trusts, including charitable trusts, Harris[19] proposes defining the trust as involving a rule-based concept where the duty is ‘to hold’ property for persons or for purposes. This duty dictates that the trustee may not do as he pleases with the trust property, but shall be subject to the rules of equity that define his role as a trustee. If the rule-based concept of duty is accepted as fundamental to the trust concept, it follows that proponents of the human beneficiary principle misunderstand the fundamental principle of the trust concept, since the human beneficiary principle is intrinsically linked to the relational concept of duty.

While the rule-based concept is most appropriate for an all-encompassing definition of a valid trust, it is submitted that the trust ought not to be defined so broadly in the first place. Hohfeld[20] points out that by its very nature, the trust comprises of an ‘exceedingly complex aggregate of legal relations – rights, privileges, powers and immunities.’ Harris’ broad understanding of the trust would be ‘no more enlightening than… a chemist trying to treat an extraordinarily complex chemical compound as if it were an element.’[21] Furthermore, it is submitted that charitable trusts are viewed as exceptional not simply because the relational concept of duty does not apply; charity has its origins in the ecclesiastical courts and it was ‘an historical accident that the court of chancery hijacked the charitable gift and inserted it into the pre-existing framework of the trust’.[22] Finally, as will be elaborated upon in later, ‘anomalous trusts’ are not an exception to the relational concept but when properly viewed, are in fact orthodox trusts held for the benefit of parties otherwise entitled, coupled with a power to expend the fund for a specific purpose.[23] For these reasons, it is submitted that the relational concept of duty should still apply in defining trusts and that proponents of the human beneficiary principle do not misunderstand the fundamentals of the trust concept.

3. The enforcer principle

In Morice v Bishop,[24] which many regard as the case establishing the human beneficiary principle, Grant MR stated, ‘there can be no trust, over the exercise of which this Court will not assume a control… every [non-charitable] trust must have a definite object [and] there must be someone in whose favour the Court can decree performance’. As McFarlane[25] points out, the above statement is focused only on the need for a party who can enforce the trust. Morice v Bishop does not clearly state that this party must also be a beneficiary. Given equity’s tendency to ‘put less emphasis on detailed rules that have emerged from the cases and more weight on the underlying principles that engendered those rules’,[26] is it sufficient to find a valid trust as long as there is an enforcer (i.e. someone with legal power to enforce the trust)?[27] If Hayton[28] is correct, then the fundamental principle of the trust concept is not about accountability specifically to beneficiaries, but accountability to someone.

Firstly, the courts have not considered the validity of a non-charitable purpose trust that provides an express mechanism for enforcement of the trust. Thus, there is a possibility that the provision of an enforcer may be sufficient in place of a beneficiary to the trust.[29] Secondly, case law seems to support Hayton’s[30] view that what is fundamental to the trust is simply that there must be an enforcer. In Re Denley,[31] Goff J stated that if the benefit from the trust were ‘so indirect or intangible… so as not to give those persons any locus standi to apply to the court to enforce the trust’, it would be an invalid trust. Finally, Hayton submits that pursuant to the UK Recognition of Trusts Act,[32] most private purpose trusts from other jurisdictions that implement enforcement mechanisms will be recognised in the English courts. If such trusts can be recognised here, there seems to be no logical reason why it cannot be implemented as a matter of domestic law.[33]

Despite the allure of these assertions, it is submitted that the human beneficiary principle is fundamental to the trust concept and should not be narrowed down to simply an enforcer principle as suggested by Hayton.[34] Although the enforcer mechanism ostensibly meets the court’s concern on enforceability, it is submitted that this is only satisfied in form and not substance. The enforcer mechanism cannot substitute the effective supervision of the trust that the human beneficiary principle provides; the relationship between enforcer and trustee lacks the tension that is generated by the self-interest of the beneficiaries in ensuring that trust obligations are discharged to their own personal benefit.[35] This flaw was possibly the reason why Bermuda, which adopts an enforcer mechanism, made subsequent amendments to allow the enforcement of the trust by anyone whom the court considers to have sufficient interest besides the enforcer.[36] Notwithstanding Bermuda’s legislative response, it is submitted that this is still unsatisfactory; despite a higher possibility of someone else enforcing the trust, what is the realistic possibility of anyone other than the settlor, trustees or enforcer even finding out about the existence of the trust to begin with?[37] Another obstacle to the enforcer principle is determining to whom the enforcer owes a duty. If the Bermudian model of the enforcer mechanism is adopted, the settlor can compel the enforcer to act; instinctively, one may suggest that the enforcer owes duties to the settlor. However, would the trust then be regarded a sham, perpetuating the settlor’s control over the trust, taking on the appearance of an agency relationship rather than a genuine trust?[38] Finally, Penner[39] points out that if a third party is appointed to oblige the enforcer to act, this could go on ad infinitum if another party is required to ensure the third party exercises his duty. Therefore, it is submitted that fundamentally, the trust concept cannot merely require an enforcer for reasons stated above; a human beneficiary is necessary and thus proponents of the principle do not misunderstand the trust concept.

4. ‘Exceptions’ to the beneficiary principle

If the human beneficiary principle is fundamental to the trust concept, how would one explain the validity of the trust in the ‘anomalous cases’,[40]Quistclose[41]and Re Denley[42] despite not appearing to satisfy the beneficiary principle?

In Re Endacott,[43] the Court of Appeal identified a group of anomalous cases involving trusts that were upheld as valid despite non-compliance with the beneficiary principle. These cases were explained as the court’s ‘concessions to human sentiment’[44] and were not to be extended. Several categories of private purpose trusts were identified, such as those involving 1) maintenance of particular animals,[45] 2) erection or maintenance of graves and monuments,[46] 3) saying masses in private[47] and 4) promotion of fox hunting.[48] However, McFarlane[49] asserts that upon further analysis, these cases do not represent an exception to the human beneficiary principle but an exception to the principle that ‘a valid power is [not] to be spelt out of an invalid trust’.[50] This point is illustrated by Re Thompson,[51] where the court ordered that the fund should be paid to the recipient (i.e. trustee) on an undertaking to apply the money for the specific purpose, with the residuary legatee having the power to apply for the funds if the trustee does not spend the funds for the purpose. Therefore, the concession made by the courts is to re-characterise the invalid purpose trust that offends the beneficiary principle into a trust for the benefit of the party otherwise entitled, coupled with a power for trustees to spend the fund on the specified purpose and is not an exception to the beneficiary principle.

Next, could Quistclose[52] represent a departure from the beneficiary principle? In Quistclose,[53] Lord Wilberforce held that a primary trust arose when Quistclose (“Q”) lent money to Rolls Razor (“RR”) for it to distribute dividends. Upon the insolvency of RR, it was held that the primary trust had failed and an intended second trust in the event of insolvency arose in favour of Q.[54] One interpretation of the decision is that the primary trust was a private purpose trust; this meant that a valid trust could exist notwithstanding the lack of a human beneficiary. However, such a view is questionable. Firstly, the absence of a discussion on the beneficiary principle in Lord Wilberforce’s judgment casts doubt on the inference that Quistclose[55] was intended as an exception to the principle. Next, the second trust in favour of Q upon RR’s insolvency is in conflict with a significant principle of insolvency law, which states that proprietary interests ought not to emerge for the first time on insolvency due to its effect on other creditors.[56]In Twinsectra,[57] Lord Millett expanded upon his extra-judicial analysis[58] of Quistclose and reached a different analysis of Quistclose that was affirmed in subsequent cases.[59] Essentially, Lord Millett held that if A loans money to B on a condition that the money is applied only for a specific purpose, ‘a trust of the money immediately arises in A’s favour, but the trust is defeasible by the exercise of a power vested in B to apply the money for the specified purpose.’[60] Thus, this interpretation means that there is no exception to the beneficiary principle; it is similar to the anomalous trusts explained above where trusts are combined with a power to expend funds for specific purposes.

Finally, is the decision of Re Denley[61] an exception to the beneficiary principle? In Re Denley,[62] Goff J held that where a trust, even if ‘expressed as a purpose, is directly or indirectly for the benefit of an individual or individuals (…) it is in general outside of the mischief of the beneficiary principle’ since the duties of the trustees can be enforced by parties who factually benefit from the performance of those duties. Rather than as an exception to the beneficiary principle, Re Denley[63] can be interpreted as ‘an attempt to liberalise’ the orthodox notion of a beneficiary (i.e. beneficiary with equitable interests) in the context of the beneficiary principle to include ‘factual beneficiaries’.[64] However, one may assert that factual beneficiaries are distinguished from orthodox beneficiaries in terms of the rights that they possess and thus constitute an exception to the human beneficiary principle; there are cases with opposing views[65] on whether factual beneficiaries can collectively apply the rule in Saunders v Vautier[66] to terminate the trust. It is submitted that the eventual outcome is irrelevant to whether there is a departure from the orthodox beneficiary principle. As stated earlier in points 1 and 2, the beneficiary principle is based on the fundamental understanding that the trust exists as a right-duty correlation; since the rule in Saunders[67] was explained previously as a power correlating to a liability and not a right correlating to a duty, the outcome is irrelevant.

Therefore, the ‘anomalous cases’ and Quistclose[68] are valid trusts because they comply with the fundamental human beneficiary principle and do not represent a departure from the orthodoxy. Additionally, Re Denley[69] is to be seen as an extension of the human beneficiary principle to include factual beneficiaries and not a departure from the fundamental principle. Hence, it is submitted that proponents of the human beneficiary principle do not misunderstand the fundamental principle of the trust concept.

5. Beneficiary principle as a corollary of conceptual certainty: Admittedly, the requirement of certainty of objects[70]and the beneficiary principle may appear indistinguishable. Both requirements are rooted from the idea that the trust must be enforceable and capable of supervision by the court. As Pearce[71] points out, ‘it is possible to re-analyse the cases that offend against the beneficiary principle as cases of uncertainty.’ In Re Thompson,[72] the purpose trust was valid as it was ‘defined with sufficient clearness and is of a nature to which effect can be given’. Similarly, the ‘anomalous exceptions’, as discussed earlier, satisfies the certainty requirements since a court could ascertain if particular graves or animals were maintained or cared for. Furthermore, invalid purpose trusts can be justified on the grounds of uncertainty; in Re Astor,[73] it would have been impossible to evaluate whether the trust property was applied ‘for maintenance of good understanding between nations’.

Notwithstanding the above, it seems clear that the courts view the beneficiary principle as an independent requirement in addition to certainty of objects. In Re Astor,[74] uncertainty was a secondary ground for the decision. Furthermore, Lord Evershed MR in Re Endacott[75] expressed the beneficiary principle as a separate requirement by stating that ‘no principle perhaps has greater sanction or authority behind it than the general position that a trust by English law, not being a charitable trust, in order to be effective must have ascertained or ascertainable beneficiaries’. Therefore, cases suggest that the human beneficiary principle should be viewed as operating in tandem with the law of certainty of objects; the former being a broad principle which states that valid non-charitable trusts require human beneficiaries, while the latter being focused on whether in fact there are beneficiaries ascertainable to the court.

6. Conclusion

The human beneficiary principle complements the view that a trust involves a relational concept of duty. While a rule-based duty can encompass all types of valid trusts, it fails to capture the nuances of the trust concept. Although Hayton[76] suggests appointing an enforcer to substitute a human beneficiary, the level of supervision by a beneficiary, incentivised by self-interest, is irreplaceable. Additionally, cases that ostensibly offend the beneficiary principle actually comply with it upon further analysis. Finally, it is clear that the beneficiary principle exists as an overarching principle rather than as a corollary of the certainty of objects requirement. Therefore, it is submitted that proponents of the human beneficiary principle do not misunderstand the fundamentals of the trust concept. Instead, as this discussion demonstrates, the human beneficiary principle in fact forms part of the fundamental principles of the trust concept.